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Valuing Growth Strategy Management by Hotel Chains Based on the Real Options Approach

Author

Listed:
  • Onofre Martorell Cunill
  • Carles Mulet Forteza
  • Micaela Rosselló Miralles

Abstract

This paper proposes a method for valuing growth strategies by hotel chains, especially when the investment project involves a high degree of uncertainty. To do this, first the opportunity risks that are inherent in this type of investment project have to be defined and the shadow options ascertained. The second step is to describe the strategies available to hotel chains and the combinations of real options they have implemented. The third step is to propose an investment strategy valuation method that will enable the selection of a strategy that maximizes the value of the company. The most important contribution of this paper is that it highlights the problem that failure to recognize the real options inherent in hotel investment strategies where uncertainty is involved will lead to undervaluation, while the recognition of options that are not key factors (over-recognition) can be misleading. This emphasizes the importance of recognizing only options that are key to the investment project.

Suggested Citation

  • Onofre Martorell Cunill & Carles Mulet Forteza & Micaela Rosselló Miralles, 2008. "Valuing Growth Strategy Management by Hotel Chains Based on the Real Options Approach," Tourism Economics, , vol. 14(3), pages 511-526, September.
    • Handle: RePEc:sae:toueco:v:14:y:2008:i:3:p:511-526
    DOI: 10.5367/000000008785633640
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    References listed on IDEAS

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    1. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
    2. Trigeorgis, Lenos, 1993. "The Nature of Option Interactions and the Valuation of Investments with Multiple Real Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(1), pages 1-20, March.
    3. Helga Meier & Nicos Christofides & Gerry Salkin, 2001. "Capital Budgeting Under Uncertainty---An Integrated Approach Using Contingent Claims Analysis and Integer Programming," Operations Research, INFORMS, vol. 49(2), pages 196-206, April.
    4. Fevzi Okumus, 2004. "Implementation of yield management practices in service organisations: empirical findings from a major hotel group," The Service Industries Journal, Taylor & Francis Journals, vol. 24(6), pages 65-89, November.
    5. Trigeorgis, Lenos, 1991. "A Log-Transformed Binomial Numerical Analysis Method for Valuing Complex Multi-Option Investments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(3), pages 309-326, September.
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